I’d like to begin this article with a few quotes that I find particularly relevant to what we are about to discuss.
“Many years ago, an older partner taught me to distinguish between outcomes that are unlikely, and outcomes that are catastrophic. The latter are to be avoided even if the odds on them are tiny.” -Peter Bernstein
“I am in the insurance business, and anything that can happen will happen.”-Warren Buffet
“Unprecedented events occur with some regularity, so…be prepared.” -Seth Klarman
You’ll do well to keep these quotes in the back of your mind as I introduce our upcoming protocol launch: Y2K Finance.
Y2K Finance is a suite of structured products we have designed for exotic peg derivatives, that will allow market participants the ability to robustly hedge or speculate on the risk of a particular pegged asset (or basket of pegged assets), deviating from their ‘fair implied market value’.
The protocol brings three main products to the table:
This flagship Y2K structured product leverages a variant of the ERC-4626 standard for the creation of fully-collateralized insurance vaults. Users can use these vaults to hedge, speculate and underwrite the volatility risk associated with various pegged assets. Token holders are rewarded from trading fees derived from this marketplace.
Pushing on-chain derivatives to the bleeding edge, Tsunami is a Collateralized Debt Obligation (CDO) powered lending market for pegged assets with MEV-proof liquidations.
Providing a secondary market for the trading of tokenized risk, Wildfire is an on-chain RFQ orderbook where users can trade Y2K risk tokens amongst themselves, both unlocking ample liquidity and allowing for rapid repricing of semi-fungible tokens in a fickle market.
There is also the matter of size. The market we are trying to capture has ballooned to unprecedented levels, with stablecoins driving most of that growth. The top three stablecoins (USDT, USDC, BUSD), account for over 17% of total cryptocurrency market capitilization alone.
Parabolic Growth of Stablecoins
There is little doubt in our mind that the prevalence of stablecoins and other pegged assets will only continue to grow, which is why we felt Y2K to be an essential and much needed (now more than ever) component in the DeFi ecosystem.
As mentioned before, Y2K is a suite of structured products and not a singular mechanism. Describing all the products in detail will make this too lengthy. So, for the sake of time, the fact that more details will be provided in the soon-to-be released Whitepaper, and because I’m lazy, I’ll use this section to provide a brief overview of the flagship product: Earthquake.
Let’s define a risk position as an ETH deposit in one of two types of vaults: “Hedge” vaults and “Risk” vaults. A user can ‘purchase’ insurance on a de-peg event on any of our supported assets by depositing to the corresponding “Hedge” vault. Conversely, they can “sell” insurance by depositing funds in the “Risk” vault.
Each pair of vaults has the following properties:
Asset: The specific pegged asset the vault is trading.
Epoch: The start and end date of the vault.
Strike: How far from peg the pegged asset price needs to deviate in order to trigger a liquidation event and hence a payout to the “Hedge” vault depositors.
Participants can deposit into Y2K vaults at any time before the epoch start date, after which funds are locked for the duration of the epoch. Chainlink oracles are used to monitor pegged asset prices, and in the scenario where an asset de-pegs to a degree larger than the strike of a vault pair, the contents of the risk vault are liquidated and awarded to the hedge vault depositors.
In the event of no de-pegging over the course of an asset’s insurance epoch, both hedge and risk payments are delivered to the insurance sellers. It’s important to note that insurance sellers receive premiums regardless of whether there was a liquidation event, and all cash-flows occur at the end of the epoch.
Please enjoy this diagram depicting the above using UST as an example (rest in peace).
At launch, Earthquake will support the following tokens:
Further vaults will be added and selected through governance via the Y2K token. While we are on the topic, let’s discuss some of it’s uses.
We tried to design the token in a way that would make it desirable, or at the very least have significant utility.
Some of the current planned utility is detailed below:
1. Fee Revenue
a. 5% of Hedge Vault deposits
b. 5% of Risk Vault deposits upon a depeg event (no fee is charges if peg is maintained)
a. Conviction locking for our strongest supporters and heaviest users.
b. Emissions allocations to incentives usage of specific vaults.
c. Revenue boosting based on lock duration.
d. Marketplaces for vlY2K.
3. Governance and Bribery
a. Governing power over addition of new assets and derivative products.
b. Opportunities to generate yield by selling rights to projects seeking inclusion.
Before we end this article, let’s quickly discuss what we have planned for the future. We want to continuously add to our suite of products, so shortly after launch we will be working on releasing:
1- Multichain stable-coin support.
2- Rebasing Mechanisms to prevent position dilution in vaults.
3- Predictive models to forecast asset de-pegging.
4- Peg arbitrage vaults.
5- Auto-compounders for Y2K insurance deposits.
As you can see, we have alot of cool stuff planned for the future and we hope that you guys will also suggest new ideas for us to implement.
I hope this article has gotten you at least somewhat interested in our protocol launch (Aug/Sep) and we will be releasing more information closer to that date.
For now if you’d like to keep posted on any news please follow our Twitter:
Thank you for reading,